Steve Blank, Author, The Lean Startup

Steve Blank: Lean Startup Legend

Through his books and many lectures, Steve Blank shares lessons from the early days of Silicon Valley, his development of the Lean Startup method, and the true joy of entrepreneurship. To hear some of this immense wisdom, you can sign up for one of his courses at Stanford or NYU—or just read ahead…

If you’re new to the startup space, Steve Blank is the biggest name in tech you haven’t heard of. A serial entrepreneur-turned-educator, in entrepreneurial circles he’s referred to as one of the “Godfathers of Silicon Valley.” A master of the startup, he was involved in or founded eight venture-backed Silicon Valley companies, including software company E.piphany, which alone raised $66 million prior to going public in 1999, then being acquired for $329 million in 2005. Basically, he’s a Silicon Valley pioneer who was killing it in the startup space when the rest of us were watching Muppet Babies.

Drop his name around the offices of Facebook, Apple, Google, et cetera, and you’ll get knowing and approving nods. Follow him around Palo Alto and you’ll see him get asked for autographs. When it comes to how startups operate today, it seems everyone owes a debt to this man. If you’ve heard of the Lean Startup, you’re familiar with his work already.

Today, Blank lectures at Stanford, UC Berkeley, New York University, UC San Francisco, the joint Berkeley-Columbia MBA program, and the NSF and NIH through the Innovation Corps program he developed. The Harvard Business Review named him one of 12 Masters of Innovation in 2012. CNBC recognized him as one of the 11 Notable Entrepreneurs Teaching the Next Generation. In 2013, Forbes listed Blank as one of the 30 most influential people in tech. Blank’s books, blog, and interviews are often featured in world news publications such as The New York Times, Forbes, Inc., TechCrunch, and The Wall Street Journal.

His teaching commonly focuses on the Customer Development strategy that he developed throughout his accolade-rich career. His 2003 book, The Four Steps to the Epiphany launched the Lean Startup movement. And a decade later, the sequel The Startup’s Owner’s Manual cemented his place on all entrepreneurial required-reading lists. Not bad for a man who’s technically been retired for more than a decade.

Fifty years ago, if you’d asked the then-airport cargo handler at Miami International what he thought his future held, being a multi-millionaire entrepreneur, author, and university educator would not have ranked very high. Despite now teaching entrepreneurship to Ivy League students, Blank never completed a formal business education. “I ended up backing into startups,” he says.

Blank’s backstory is—like that of many successful entrepreneurs—an unlikely string of events that seem to collate into a bizarre and unrepeatable pattern of experiences somehow perfectly suited for entrepreneurship. “It all started because I guess I was unemployable; unable to do anything else,” Blank says. “I started my career as a college dropout, ended up unemployed and loading race horses onto cargo planes at Miami International Airport. I fell in love–not with the horses or not even the planes–but the electronics equipment.”

With no other avenue open to him where he might gain experience with electronics, Blank joined the Air Force. During the Vietnam War. “Not very bright,” he confesses, but acknowledges it was useful spending two years in Southeast Asia. Blank cut his teeth, not in business school, but quite literally in the field of battle. “I found I was pretty good at operating under pressure and figuring out patterns from random data.” Key skills for a burgeoning entrepreneur.

Blank arrived at Silicon Valley in 1978, “the beginning of the boom times.” As the first tech wave was gaining momentum, Blank was involved in eight startups in a row, ranging from supercomputers to personal computers, from semiconductors to video games, from the macro to the micro, on just about every level. After 21 years working as an entrepreneur and almost as long as an educator, he notes the game has changed somewhat. “Everything we used to teach people was fundamentally wrong,” Blank says. “Not kind of wrong, but completely wrong. Because entrepreneurship was being explained by people who never did it. So we put together a much better theory, which actually seems to work, on how to build companies, called the Lean Startup.”

The Lean Startup has been a familiar term in every entrepreneur’s lexicon for years now. While Blank didn’t coin the term (that honor belongs to Eric Ries, cofounder and former chief technology officer of IMVU), the Customer Development component of the model that he developed, in particular, largely changed the way startups are built.

THE LEAN STARTUP: A FIVE-MINUTE CRASH COURSE

Okay. We’ve heard about it. Everyone talks about it. But what is the Lean Startup? Put simply, it’s a way to adapt business for the digital age to reduce startup failure rates and boost innovation. It speeds up the pace of testing new ideas, making use of the inexpensive and agile technologies of the Internet and open-source software. “The Lean Startup is nothing more than three pieces,” Blank says:

1. Write your hypotheses. (Business Model Canvas)

“The first thing you’re trying to understand as an entrepreneur is solving someone’s problem or fulfilling someone’s need.” Exploring how your customers are solving the problem already and why and how they would use your solution is crucial to the process. Blank explains this first step is where you put your hypotheses together. “This first step is about articulating and summarizing all your guesses about: Who’s my customer? What are my features? Who’s my distribution channel? How am I going to get, keep and grow customers? Pricing? Costs? Resources? Activities? The very first thing is to convince me that anybody else other than you cares about the problem and solution.”

2. Test your hypotheses. (Customer Development)

“The part which I invented is called Customer Development,” Blank says. “It’s a formal way of simply getting out of your building and testing those hypotheses. Talking to potential customers or partners or regulators or anybody else who is involved in your potential business.” As a rule of thumb, Blank recommends talking to a minimum of 100 people to validate your Business Model Canvas. “While you might spend two or three months doing this, in 90 days you’ve probably saved yourself a year-and-a-half worth of burn rates and frustration by actually learning all of this stuff, because people have taught you rather than you guessing!”

3. Show prototypes. (Minimum Viable Product)

“We use something called Agile Engineering to build Minimum Viable Products, which is a fancy term for prototypes. As you’re going out and talking to people, you’re actually showing them these Minimum Viable Products.” Blank explains a prototype might be as simple as “a PowerPoint slide or a wire frame or software.” But the idea isn’t that a Minimum Viable Product is a smaller version of the product, “it’s whatever gets you the most learning at that time.” The Lean Startup playbook teaches a rapid development of a Minimum Viable Product, designed with the smallest group of features to please a set of customers. Once shipped, the startup should continually experiment by tweaking its offering, noting how the market responds and altering the product accordingly.

“So now you have the entire Lean Startup semester of lecture at Stanford in five minutes!” he laughs. Using this process, Blank argues, will save businesses their two most valuable resources: time and money. “Most of the time you’re going to discover that your hypotheses, your guesses about a good chunk of your business, were wrong.” That allows businesses to move with speed and urgency “but spending a tenth of the money we used to spend in the old days.”

“A good chunk of entrepreneurship is this—showing up is 80% of the game.” According to Blank, you could be a genius, you could have insight, you could have whatever.

“But if you’re not standing there volunteering for stuff that just interests you and showing up for both the good jobs and the bad, you’re not going to get picked to be part of the team. It doesn’t get handed to you. Entrepreneurship is not assigned.”

For Blank, success in the startup game is for those who stand up and take a leap. “That’s pretty important and that was the story of E.piphany and almost everything else I ever did.”

Let’s face it: most business plans are exercises in creative writing.

The best projections and five-year estimates are only ever just that: estimates. “We learned something over 30 years of innovation in Silicon Valley and what we learned was, no business plan survives first contact with customers.” According to Blank, the fundamental flaw was most startups don’t execute existing business models, because they typically don’t know who their customers are. “We really don’t know what our features are even though the founder will tell you, ‘No, in the vision I have, here’s what customers will want.’”

However, Blank argues that if entrepreneurs follow the Lean Startup process—speaking to a minimum 100 customers or partners in 10 weeks—instead of creative writing, your business plan becomes “a narrative that talks about what you’ve learned rather than what you think might happen. And let me tell you, the difference between a plan that actually is fact-based versus one that is faith-based, really might make the difference with investors.”

This Godfather of Silicon Valley is under no illusions that you’ll get your startup right the first time, or every time. No one does, including him. “In Silicon Valley, especially amongst entrepreneurial clusters, there’s a special word for a failed entrepreneur: Experienced.” In Silicon Valley, you’re not considered a failure if you blow 35 million dollars, or 50, or a hundred. “You’re considered someone who learned a lot and is probably worth investing in again.” The key to everything is experience. And Blank is an expert on gaining necessary experience without breaking the bank.

Unsurprisingly, Steve Blank is satisfied with how his entrepreneurial journey has turned out. And it seems even without all his multi-million dollar successes, he’d still be satisfied. “This is the best thing you could do with your life. To create something that just never existed before. And the payoff is you can make a lot of money out of it,” he says.

But for Blank, the goal is never about the money. “It’s the calling. It’s the ability to just invent and see hundreds, thousands, potentially millions or even billions of people use something that you created. And what could be more fun than that?”

STEVE BLANK’S TOP TWO MISTAKES TO AVOID

Steve Blank has had a successful career teaching entrepreneurs how to gain experience quickly, and to create nimble and effective startups with minimum financial strain. That involves learning from other people’s mistakes before you make them yourself. Two big ones:

1. BELIEVING YOU ARE A VISIONARY

Almost every entrepreneur believes that they’re visionaries. Data says about 98% of them are hallucinating. The distinction is that those who are actually true visionaries have got out of the building and tested their vision way before they spent a ton of money on it.

2. BELIEVING THE TECHNOLOGY IS THE COMPANY

The other mistake made by technologist entrepreneurs is believing that the technology is the entire company. Even if you have the world’s greatest invention, your technology is going to die unless you figure out who the customers are or what the distribution channel is, what pricing is, how much it costs to acquire a customer. You need to figure out the rest of the commercialization components to the technology.

Key Takeaways

The unexpected highs and lows of entrepreneurship, the harsh truths and positive realities

What it takes to get ahead, and stay ahead

Full Transcript of Podcast with Steve Blank

Nathan: Hey, guys. Hope you’re having a great day today wherever you are around the world. Welcome to another episode of the “Foundr” podcast. This is episode number 64 with the one and only, Steve Blank. So if you haven’t heard of Steve, he is a massive, massive driver of the “Lean Startup” movement. He’s wrote some brilliant books, one namely “The Four Steps To Epiphany,” which is all about the customer development process. He’s wrote “The Startup Owner’s Manual,” where it’s just everything you need to know around entrepreneurship. And as I mentioned, he’s been a massive driver and one of the people that is behind the “Lean Startup” movement.

And for those of you that are not familiar with the “Lean Startup” movement, it’s an innovative way that a lot of tech start-ups are being built and launched now. It’s been pretty much conceptualized also by Eric Ries and he’s been driving this for his book, “The Lean Startup” and it’s a massive movement and it’s really, really powerful. We’ve used “Lean Startup” methodology to develop products for Foundr and I think it’s absolutely killer. I highly, highly recommend you check out Steve and Eric’s stuff. But look, let’s talk about today’s episode with Steve. I’m really, really excited to show you this conversation.

A little bit of an intro around Steve. He’s done eight start-ups, four IPOs, he’s lost $35 million worth of his investors’ money. He’d given…of those investors that he’d lost their money, he got given another $12 million of them and he paid them back $1 billion each, to those two investors. So this is just a little bit of a teaser of the kind of caliber of entrepreneur and thought leader Steve is. He teaches entrepreneurship at Stanford University now. This guy’s a serious boss and I’ve really enjoyed our conversation. I could talk to him all day. This is a personal favorite episode.

I’ve been telling quite a few of my friends, “Get ready for this one,” because I think it’s just so good. And I’m really proud of this conversation and just how much gold is shared. So that’s it from me, guys. I hope you’re enjoying these interviews. If you are, please do take the time to leave us a review, please do subscribe. That way, you never miss an interview. And please do check out the fruits of our labor, “Foundr Magazine,” go to the website, check out our stuff. We’re all about providing as much epic content as we can, to support you guys and to help you build and grow a successful business. All right, that’s it from me, guys. Now, let’s jump into the show.

Nathan: Can we just start off with, how’d you get your job?

Steve: Which one?

Nathan: Well, I guess, what led you to teach entrepreneurship? And tell us a little bit about your background. You’ve done eight start-ups, four IPOs, you’re known as–in many places–“the Godfather of Silicon Valley.” Can you give an insight around how that all started?

Steve: Well, it all started because I guess I was unemployable to do anything else. I started my career as a college dropout, ended up kind of unemployed, loading race-horses onto cargo planes at Miami International Airport and fell in love with…not the horses or not even the plane and the pilots, but actually, the electronics equipment. And when I asked, “How can I get a job in this,” someone said, “Well, you should have stayed in school.” And they said, “Well, the other place where you’re going to learn this is the Air Force.”

And so, I joined the Air Force during Vietnam. Not very bright, but it was actually quite useful. Spent a few years in Southeast Asia and then, when I came on, I learned that I actually did have a skill besides electronics. I was pretty good at operating under pressure and figuring out patterns from random data and…or what was apparently random data. So I ended up kind of backing into start-ups. I came out to Silicon Valley in the 1970s, in the beginning of the boom times and did eight start-ups in a row and…with ever-increasing responsibility.

And unlike my students, I’ve never been smart enough to think I can do it by myself at first, out of school. So I kind of worked for other people who were good at it and eventually, I cofounded companies and then, was CEO of them. And then…so that was career two. Career one, the military, career two, entrepreneurship, actually doing it for 21 years. And career three has now been as an educator almost as long, now thinking about everything we used to teach people was just fundamentally wrong. Not kind of wrong, but completely wrong, because it was…entrepreneurship was being explained by people who never did it.

And so, we put together a much better theory, which actually seems to work, on how to build companies called the “Lean Start-up.” So that’s the background.

Nathan: Now, look, I’m a massive proponent of the “Lean Startup” methodology, what you and Eric have…this movement that you and Eric have created has really changed the game for my business and so many other businesses around the world. But before we delve into that, I’d like to delve into eight start-ups, four IPOs. That’s a lot of experience and years. That is a lot of businesses there, but can you tell us about…I guess, let’s touch on your last one, Epiphany.

Steve: Yeah.

Nathan: Can you tell us a little bit about that, how that started? Because it kind of fits in nicely with what you have…what you guys did with the “Lean Startup” movement.

Steve: Yeah. Epiphany started when my ex-boss–a guy named Ben Whitebride, who was my boss and mentor for a good part of my career–walked into my house and said, “Hey, I think this thing called enterprise software would be interesting. Why don’t we automate the marketing department? Steve, you know a lot about marketing.” And I listened to Ben and then threw him out of my house and said, it’s a very stupid idea. And much like everything Ben had told me, it took me three days to understand what the hell he had said, because after three days, I called him back and realized he had a very good idea.

And so, we started testing hypotheses about, was this a new domain to automate, how would we automate it? There was this thing called the Internet browser that came out, maybe we should use that as a front end, rather than client server stuff. And essentially, we built a company with $125 million of revenue, hired the chief operating officer of KPMG to run it, got Kleiner Perkins to fund it and went public with a…eventually, an $8-billion market cap, which is why I’m retired and not doing start-up nine or ten. Appreciated the last Internet bump.

So by the way, a good chunk of entrepreneurship that your listeners ought to understand is, showing up is 80% of the game. It’s a big idea, which is, you could be a genius, you could have insight, you can have whatever. But if you’re not standing there volunteering for stuff that just interests you and showing up a lot for both the good jobs and the bad, you’re not going to get picked to be part of the team. And so, while there are a lot of other moving parts to entrepreneurship, I just want to start with, it doesn’t get handed to you.

Entrepreneurship is not kind of a side. It’s for those who kind of stand up and take a leap. And I’m sorry to take that side trip, but that’s pretty important. Then, that was the story of Epiphany and almost everything else I ever did.

Nathan: So when you talk about just showing up, you say something else that really fascinates me around entrepreneurs being artists. Can you give us an insight into what you mean by that?

Steve: Sure. And here, I’m talking about the founders of a company, not the employees. It doesn’t mean you can’t be an artist if you’re an employee. But founders…if you really think about what they’re doing…is, they’re creating something new that’s never been done before: either never been done, like literally never been done, or never been done in this form. And you kind of go back and you think about, “Well, who else does that?” Not accountants, not clerks in a store. They’re kind of executing a known set of things.

The people who are…create things out of nothing–out of just their vision–are sculptors or painters or writers who look at a blank canvas and the next thing you know, there’s “Starry Night.” They see a blank, square sheet and the next thing you know, there’s Beethoven’s life. And founders operate the same way. They have a vision of something that might be. And much like artists, it’s that passion to bring that vision to fruition that drives you past all those miserable times of, your cofounders quit and then, the toilet’s stopped up and you’re the facilities manager as well. And your largest customer just change your mind and said they’re not taking that big order. In fact, they’re not going to be your customer anymore.

All that stuff happens. And if what you think is…you’ve signed up for is just a job, you’ll quit in two minutes, going, “Well, why did I put up with this?” But if in fact, you realized that your eye is on the prize and the prize is something that you’re going to create, you’ll be driven through all those bad times. And the good news is, we kind of understand that being an artist is a calling, not a job and that same is true for entrepreneurship. Entrepreneurship is not a job, it’s a calling. And if you’re not called, don’t do this or be an employee later on of someone else’s vision. But don’t do it because your friends think it’s cool and you think it’s the neat thing to do. It’s the world’s worst job, but it’s the world’s best calling.

Nathan: Mm, I love that. You talk about also showing up. You mentioned showing up. And I agree, persistency and just being consistent is so extremely important. But I have to ask you of all people, it must be more than just showing up, right, to build a successful business? You’ve created eight canvases, I’m sure many more. Probably eight is just your…eight start-ups, four IPOs, that’s probably just your notable achievements. Are start-ups that easy, of just showing up? What does it take to build a successful business?

Steve: Well, there is a whole front end to the start-up process that neither I nor Eric Reis nor Osterwalder focused on. And that’s the ideation and creativity phase. And in that phase, it’s, how do you get the ideas? How valuable are they? How big are they going to be, etc.? And in fact, the best person in the world for that who’s written a ton of books is, Tina Seelig at Stanford University focuses on that phase. So step one is, you’ve got to have an idea and some creativity and figure out whether it’s a small business idea or an idea that’s scalable to something that could go global.

But the part that we focused on, the…Eric Reis, Steve Blank, Alexander Osterwalder…the “Lean Startup” stuff says, “So what do you do once you have that idea? What’s the most efficient way to build the company?” And this is kind of where the “Lean Startup” kind of comes in, which is a radical break. I mean, just radical, it’s not a better version of what we used to do. It is, like, out of outer space. It’s…we never used to do this at all.” And can I describe what it is, the “Lean Startup” stuff?

Nathan: Oh, please. Please, please. This moves into it perfectly, because it’s a massive movement. There’s meet-ups all around the world of many different companies who’ve started with this methodology, so please.

Steve: So the methodology is pretty simple. It says in the old days, what used to happen is, you’d write a business plan, a document describing who you are, the opportunity, the size of the market. You do a five-year forecast and you know, you try to tell your investors, “It’s going to be $100 million in year five,” whatever units that was, if that was always the answer. And then, if you were smart, you turned that plan into nine slides and your VCs loved it and they funded you and then, you simply execute it against the plan.

That is, you built the hardware and software and you would do alpha tests, beta tests and first customer ship. And then, you’d stand back and you would assume that the only thing you might have gotten wrong: whether the office was big enough to put all the bags of money that were supposed to come in. And it almost never worked like that. I mean, it worked like that enough that venture capitalists kept insisting that is the way we did it. But we kind of learned something over 30 years of innovation in Silicon Valley and what we learned was, no business plan survives first contact with customers. It’s a big idea.

But we didn’t know what else to offer entrepreneurs. And by the way, where does the business plan come from? It comes from large companies: is, when you would do a second or a third or a 10th or a 50th product at a large corporation, you had a series of knowns, meaning you knew who your customers were, you knew what technology you had, you knew what engineering could build, you knew your distribution channel, you knew a lot of stuff. So you can write it all up in a plan and you could execute that plan. So companies are execution engines, meaning they do the same thing repeatedly. And there were job specs, that we know what everybody’s supposed to do, etc.

We assumed we could take that same idea, that same process of writing a plan and executing and tell start-ups to go do that, “Here, you wrote the plan, I gave you money. Go execute it. And by the way, if it doesn’t work, obviously there was nothing wrong with the plan. It must be your VP of sales. So let’s fire the VP of sales and then, we’ll fire the VP of marketing and then, before we run out of money, we’ll fire the founder, just to make it even.” And by the way, we all kind of laughed, because everybody recognized that, but nobody recognized there might have been a fundamental flaw. And the fundamental flaw is, start-ups–most of them–don’t execute existing business models.

That is, we typically don’t know who our customers are. We think we know. And we really don’t know what our features are, even though the founder will tell you, “No, the vision I have, here’s what customers will want.” What we really have on day one…and here’s the key to the whole “Lean Start-up.” What we really have is a series of untested hypotheses. And I use this fancy word, “hypotheses,” because at Stanford, these students pay $50,000 a year. But in reality, the word “hypotheses” means we’re just guessing about all this stuff in a start-up, where there are knowns–that is known stuff: known customers, known channel, known whatever in a company–that exist.

In a start-up, you’re guessing. And so, instead of executing a business model, here’s the big idea: you’re searching for one. And this searching for one means, instead of just building stuff end-to-end with every possible feature and sticking it out on the first release, you’re in fact thinking, “Whoa, if I’m just guessing, why don’t I stop talking to my cofounders and start talking to people outside my building to actually turn those faith-based assumptions into facts as rapidly as possible?” And so, the three parts of the “Lean Startup” kind of allow you to simply do this.

The first part is getting all your hypotheses on a single piece of paper. And Alexander Osterwalder invented something called the “business model canvas,” which is the best way, which is a front end of the “Lean Startup” process, to articulate and summarize all your hypotheses, all your guesses about, “Who’s my customer? What are my features? Who’s my distribution channel? How am I going to get, keep and grow customers, pricing, costs, resources, activities, etc.?

The second part, which I invented, is called customer development. And it’s a formal methodology or a formal way of simply getting out of your building and testing those hypotheses: talking to potential customers or partners or regulators, or anybody else who’s involved in your potential business. And the third part–and that’s all this is, is three pieces–is that as you’re going out and talking to these people, you’re actually showing them what is called “minimum viable products,” which is a fancy term for prototypes that might start out…a prototype might simply be a PowerPoint slide or a wireframe, or maybe some software.

But the idea isn’t that an MVP is a smaller version of the software, it’s whatever gets you the most learning at that time. And so, we use something called “agile engineering” to build minimum viable products. So the “Lean Startup” is nothing more than three pieces: business model canvas to put your hypotheses together, customer development to get you out of the building in a formal way, and agile engineering to build minimum viable products. And if you use this process, you save an enormous amount of time and money and you also save firing a lot of people, because most of the time, you’re going to discover that your hypotheses–your guesses–about a good chunk of your business were wrong.

But if you did this the right way–you didn’t hire a VP of sales that you’re going to have to fire at first–you were doing this at the founder. And so, what you end up doing is something called the pivot. And a pivot says, “Hey, let’s make substantive change to one or more of those business model canvas hypotheses.” We make change to our customer is, or we might change what features we’re offering, or we might change our pricing model. Maybe it’s now premium, or maybe now, it’s subscription, or maybe we’ll change the price itself.

And that just allows us to be incredibly fast, move with speed and urgency, but spend a tenth of the money we used to spend in the old days. So now, you and your listeners have heard the entire “Lean Startup” semester lecture at Stanford in five minutes.

Nathan: Awesome. So there’s a few things that I’d love to unpack. And these are questions that I’ve always wanted to ask. That was a great overview. Thank you, Steve. So first things first. When it comes to…let’s start from the start. Out of curiosity, how…? Back in the day, I know you don’t do…you do investing and stuff like that now, but how did you generate ideas?

Steve: Well, you know, it’s very funny. I mentioned again, there’s an ideation and creativity front end to start-ups. And when I first encountered Tina Seelig and her creativity classes at Stanford, I laughed and said, “What are you talking about? No one needs this stuff. My biggest problem was which one of the 4000 ideas I wanted to do.”

Nathan: That’s right.

Steve: And then, I realized, “Oh, not everybody has that.” And so, if you’re not somebody bubbling with ideas, there is kind of a formal…not formal, but there’s a process to go through. And if you think about it, where do ideas come from? Well, one is, you might be a domain expert. That is, you…perhaps you worked in the…a last company where you saw, “Boy, what a stupid way they’re doing stuff. And everybody in our industry is doing it stupidly. There’s a much smarter way, because I’ve actually watched this process unfold and I know how to make it better.” That means you’re a domain expert and that’s a good way to start a company.

There’s another source of ideas that says, “Hey, the government just deregulated airlines,” or changed some regulation, or, “Gee, the health care system just changed reimbursement.” Well, there’s an opportunity here, because the rules have changed. And so, that’s another place where innovation could happen. Or it could be, you’re a technologist in a university laboratory or somewhere else. And all of a sudden, you’ve invented the microprocessor or antigravity or something else and you’ve got to go, “Gee, I wonder if anybody would be interested in my technology.” Which is…by the way, Silicon Valley historically was driven from tech.

Or there might be a new set of devices, platforms, these things called smart phones. Android or iPhone might be a great platform which never existed before and now, you’ve built a whole new class of software called apps, rather than having to build big, deployable, expensive things. So innovation could come from a bunch of areas, but the biggest risk in being innovative is confusing. And this is what really messes up first-time entrepreneurs: in confusing your vision from a hallucination.

Almost every entrepreneur believes that they’re visionaries, but data says about 90% of them are hallucinating. And the distinction is, those who are actually true visionaries have gotten out of the building and tested their vision way before they spend a ton of money on it. The other mistake, by the way, technologists who are early entrepreneurs make is believing that the technology is the entire company.

It turns out that even if you have the world’s greatest invention, unless you’ve figured out who the customers are or what the distribution channel is, what pricing is, what…all the…how much it cost to acquire a customer, your technology’s going to die, because you haven’t figured out the rest of the commercialization components or the pieces that go around your technology. Those are kind of the two failure modes of early-stage ventures of new entrepreneurs.

Nathan: You’ve mentioned also business plans. Do you recommend people write business plans? I’d love to hear your thoughts on that.

Steve: You know, the business plans now fall under the golden rule, meaning he who has gold makes the rules. And venture capitalists, particularly in places outside of Silicon Valley, in some places, still require business plans. So whether you should write them or not is irrelevant. If they require them, they have to the gold. Now, here’s how to write a killer business plan: is, you actually go through the “Lean Startup” process. And instead of creative writing, that is…I honestly believe we still ought to be teaching how to write business plans in universities. But we ought to be teaching them in the English department, because they’re a best example of creative writing that you’ll ever do in any university.

But it turns out you could actually make this quite useful: is if, in fact, you followed the “Lean Startup” process. And when I teach this method, you speak to over 100 customers or partners or whatever in 10 weeks. You now can make that plan instead of creative writing, a narrative that talks about what you’ve learned rather than what you think might happen. And let me tell you, the difference between a plan that actually is fact-based versus one that is faith-based really might make the difference with investors.

Instead of saying, “I believe,” say, “Here’s what the first 45 customers told me”–or potential customers or people who were interested–“and here’s how we modified our product based on that feedback.” You could put that in a plan, if people require…still require a plan.

Nathan: So yeah, look, let’s touch on that customer development piece. What’s your general…? No, I know we could talk about this all day, but can you give us some general rules? So let’s say somebody has an idea, what’s…? So how many people, roughly, do you recommend to speak to: 100 people, in person…

Steve: Yeah.

Nathan: …quality of, quantity of…?

Steve: It’s a…that’s a great question. And customer development–just so everybody’s not confused–is not a giant focus group of saying, “Hey, do you like the product?” Nor is it a sales process. So I’ll back up a bit and say, “Listen, the first thing you’re trying to understand as an entrepreneur is, by the fact that you started your company, you believe you’re solving someone’s problem or fulfilling a need someone has. On first principles, that’s why you’re doing this. So humor me and find me some people outside of your relatives who’ve given you money, or your friends in your dorm.

Find me some people you don’t know who share your belief that that’s a problem. And not just a problem, but a problem they would either pay for, or is in the top three to five things they would use.” So step one is, let’s validate the problem or need. Step two is, “Okay, Steve, I found those people,” whether they’re 10 or 20, or…I think they exist. Step two is, “Okay, how are they solving the problem today and why and how would they use your solution? Not your product, not go sell it, but tell me how they solve this…if this problem’s so important, how are they doing it today?

And then, finally, we could go to customer development and start bringing out minimum viable product and start talking and validating the channel and features and whatever. But the first one is, convince me that anybody else other than you cares about problem and solution? Another aside, by the way, is–this works and is pretty easy–in a marketplace that already exists. That is, if you’re entering an app market or an enterprise software market, a market exists.

But if you’re Elon Musk creating Tesla or SpaceX or the first iPhone, going out and asking people about something they’ve never even heard of is like a divide-by-zero question. And so, the question then is, “What do I do then?” Well, the answer is, you still get out of the building. But what you’re really trying to do is discovery in a very different space. You trying to understand, what’s a day in the life of the customer now and what’s it going to be like when your antigravity machine shows up for years from now and what needs to happen?

Do we get rid of parking spots? Do people need different type of garages? What’s life going to be like? And that’s worth exploring, just a different way than you would explore those answers in an existing market.

Nathan: So do you have a rule of thumb the amount of people that you should be speaking to, or what you recommend?

Steve: Yeah. So the way I teach it is, it’s 100. You need to talk to 100 people to validate your business model canvas. And I march people through, talk to 10 people to validate customer segments and 10 more to validate what’s the value proposition, which is a fancy word for products and service, 10 more to validate the channel, 10 more to validate pricing. And by the time you’re done, you’ve learned a lot. And while you might have spent two or three months doing this, by 90 days, you’ve probably saved yourself a year and a half worth of burn rate, frustration and whatever by actually learning all this stuff, because people have taught you this, rather than you’ve guessed it.

Nathan: Awesome. So look, let’s move along this methodology. We talk about the minimal viable product and it’s the MVP. That’s a buzzword that’s thrown around so often. I’m dying to hear your thoughts, like, a lot of people want to ship crap. What’s your thoughts on, how do you know when to put that MVP out? How do you know when it’s ready? How do you know when it’s not good enough or too good? How do you gauge that?

Steve: So the confusion is thinking that the MVP is kind of the alpha or the beta of a product. It has nothing to do with the product and that’s the big mistake. And let me give you a specific example. When I teach at Stanford in the Engineering school now, almost every year, I have a team who wants to do drones. And that seems to be the hot thing nowadays. And I had a team and they did great. They wanted to put what’s called a hyperspectral scanner on drones, fly them over on almond fields, which are big in California, but they suck up enormous amounts of water.

And we’re in the middle of a drought, so they wanted to figure out how much water and nutrients did each almond tree need, so they could get very specific in watering. And it was a great idea and they got an “A” in the class. And then, I got a call–which I almost often do–about 90 days later that went like this: is, “Hi Professor Blank. We’re raising seed money to kind of start our company. You know, we thought we’d call you first.” “Great. How much are you raising?” “Half a million dollars.” And I went, “For what?”

They said, “Professor Blank, maybe you don’t remember. We’re building a drone and a scanner and what…” I said, “I remember.” I said, “Didn’t I give you guys an “A?” “Oh, yes.” I said, “Well, you know, by the end of this conversation, I think I might go back and change it to an “F.” And they went, “Well, what?” I said, “You know, you don’t need $500,000. You need five dollars.” And they said, “Professor Blank, we’ve got to build the drone and scanner and whatnot,” and repeated it.

I said, “Listen, I’m not deaf or stupid. I understand what you think you need to do. What business are you in?” Now, by the way, what business do you think they were in? Any idea?

Nathan: Oh, gee. I’m not used to getting asked the question.

Steve: I know. I’m cold-calling you, just like in a class. And so, not to embarrass you, they weren’t in the drone business, they weren’t in the scanner business. They were in the business of providing data to farmers. The minimum viable product on day one for these guys was to actually mock up a report of what the data would look like, either on a screen or as a printout and take it to farmers and say, “Would you pay me money if I delivered you this data?” It had nothing to do with drones or scanners or anything else.

And in fact, when I explained it to the team, they started laughing. They said, “Darn, we’re engineers. Of course we want to build the drone and scanner.” And of course, six months later, they did exactly what I suggested and found out something amazing, which they never would have found out. Turns out in the United States, there are these small airplanes that fly over every farm field in the US called crop dusters or aerial agricultural sprayers that spray fertilizer and pesticides, who would have been happy to have those hyperspectral scanner cameras on their airplanes as a potential distribution partner, which they never would have figured out.

If they would have thought they were in the drone business, then they would have spent lots of money building drones. If they thought their business was delivering data, then they were mocking up data and figuring out how to get that right. Does this make sense for what an MVP is?

Nathan: Yeah, yeah. So it’s more just discovery, if anything…

Steve: Yeah. And so…

Nathan: …and testing?

Steve: And if you’re an engineer, it’s really easy to think that, “Oh, I get it. And MVP is just kind of a de-featured version of my final product.” No, it’s about learning. The idea of the MVP is to maximize learning at any point in time. So in time one for that start-up, it was to learn whether the farmers even cared about the data. Three months later, the MVP might have been, “Can we get a stable hyperspectral image on a crop-dusting plane?” Maybe six months later, it could have been, “Okay, but now, maybe we need drones for our organic farm fields,” for example, where there are crop dusters. Does that help?

Nathan: Yeah, 100%. 100%. That’s really, really, really spot on. So the next piece of that puzzle is product-market fit, knowing when to pivot. And this is another question I’ve been dying to ask you. And we have to work towards wrapping up, but you talk about showing up, persistency. What’s the difference between persisting with your business model and then, just making it work or pivoting and finding that product-market fit? First question is, how do you know when you’ve found product-market fit?

Steve: Judgment and experience. And that’s kind of tough, because if you’re a first-time entrepreneur, you don’t have much of either.

Nathan: That’s right.

Steve: Which makes a case for a good and then–not being facetious now–makes a case for having a good advisory board. But it certainly depends on your industry. In enterprise software, when I was selling million-dollar software packages at Epiphany, having three to five customers buying the same thing, we declared that we were done, time to scale. And think about it, if you have three to five customers on the web or for a mobile app, I’m going to be laughing hysterically. You’re off by a factor of 1000. Does that make sense? So…

Nathan: Yeah.

Steve: …it’s industry-dependent and there are usually some metrics for your business. What you’re looking for is a repeatable…here, the definition of a start-up is as follows, “A start-up is a temporary organization designed to search for a repeatable and scalable business model.” And so, you know that you’re done when you have found something that’s repeatable and scalable. And you’re a temporary organization because…by the way, the goal of a start-up is not to stay a start-up. As much as the bringing dogs to work and having free food is kind of fun, that’s not the goal. I mean…right?

Nathan: Mm.

Steve: If it is, you don’t want to be a start-up, you want to be a lifestyle business. Does it…did I answer your question?

Nathan: Yeah, 100%. So between knowing that, you just have to just work it out and then, if it’s not working, you pivot?

Steve: Yes. And what you’re looking for is–and this is hard–you’re trying to maximize global maximum, not a local maximum. And so, you’re trying to figure out, “Gee, did I find something that eventually might get me to $500,000 a year, or am I looking for something that if it works, gets me to $50 million a year?” And those are hard judgment calls, because sometimes, the market doesn’t even exist yet. Or sometimes, it’s so clear that, “Gee, I put in the input of one new salesperson,” or, “…one new person in a call center and my revenue has just gone up. Holy cow.” That’s repeatable.

Sometimes it’s not as clear. Sometimes, you need to be investing forward. Why Silicon Valley, by the way, and entrepreneurial clusters here work not because we’re smarter than anybody else, but we in fact have a lot more experienced people to help us mentor and see patterns that others have seen before. Just as an aside, for Australia, one of the biggest mistakes I’ve seen Australian entrepreneurs make is simply trying to read all the blogs written in Silicon Valley and assuming they all apply to you.

It turns out that whether you’re in Melbourne or Sydney or Adelaide or Perth or anywhere else in Australia, every city and region should have their own–what I call–regional playbook. That is, “Yes, here’s the basics of entrepreneurship everywhere. But here’s what’s different about our local ecosystem. Gee, here’s where you would get a Series A in Sydney. Oops, I need to raise $30 million in a Series B, ain’t going to be here. Where am I flying to,” and, “Who do I do it,” and, “What industry is different?” Does that make sense?

Nathan: Yeah, 100%. So let’s switch gears and work towards wrapping up. Can you create an eight or nine-figure business not working 60 hours a week?

Steve: No.

Nathan: Not possible?

Steve: No. I mean, that’s…it’s…at least for me, it’s not even debatable, you know? In fact, maybe the only business is selling mail order records on how to do that and people will believe you can.

Nathan: Awesome. So look…Yeah, look, can you tell us about a couple of your battle scars? And then, we’ll wrap there, Steve. And then, yeah, the last place is where people can find you and stuff like that. But yeah, tell us about some of your battle scars…

Steve: Well, so…

Nathan: …of working on that.

Steve: So my favorite battle scars: my next-to-last company was, of all things…you know I did two semiconductor companies, supercomputer companies, enterprise software. And by the way, I also did a military intelligence company. I lived at Pine Gap for a year, so I got to know Australia intimately, at least from sand and kangaroos. And…but my next-to-last company was a videogame company and I was on the cover of something called “Wired” magazine at the time. And 90 days after I was on the cover, I realized I was going out of business.

And just before I did, I called my mother, who was a Russian immigrant and English wasn’t her first language. And so, everything I would say would have to go through simultaneous translation in her head. And after the obligatory, “How come you don’t call me,” things and…I said, “Mom, I’m just calling you to let you know I lost $35 million.”

Nathan: Wow.

Steve: And there was a silence, because she’s translating. And then, the first words out of her mouth were, “So where’d you put it?” And I said, “No, no, no. I didn’t misplace it. I spent it all and it’s gone.” And then, there was more silence and then, she said, “Oh, my gosh. There is nowhere else for us to go. The country we came from doesn’t exist anymore.” And then, she thought a little more. And she was pretty sharp, she said, “And our name is Blank, we can’t even change it.”

And I said, “No, no, no. Mom, the reason I’m actually calling you now is, not only did I lose the $35 million, but the people who gave it to me just gave me another $12 million to do my next start-up.” And there truly was just stunned silence, then she broke into languages that I didn’t even know she knew. And then…and I thought one of them was Japanese. That was pretty impressive. And then, she said, “They told us that in America, the streets were paved with gold. I never believed it till now.” And I tell this story because it’s not a Steve Blank story. By the way, I turned that $12 million into…I returned $1 billion each to my two investors.

Nathan: Wow.

Steve: But I tell the story because it’s not a Steve Blank story. It is, in fact, an entrepreneurial cluster story, because in Silicon Valley, in entrepreneurial clusters, we have a special word for a failed entrepreneur. Do you know what it is? Special word.

Nathan: No.

Steve: A special word for failed entrepreneur is “experience.” In entrepreneurial clusters, you’re not considered a failure if you blow $35 million or $50 million or $100 million. You’re considered, if you have an ethical failure, someone who learned a lot and is probably worth investing in again. Now, if you blew it three or four times in a row, they’re probably not returning your calls. But that’s what makes both capitalism and entrepreneurship and entrepreneurial clusters really exciting and interesting to people who in fact thing they would have something to offer to the world. This is the best thing you could do with your life, is create something that just never existed before.

And the payoff–not the goal, but the payoff–is, you can make a lot of money out of it, but the goal should never be the money. It’s the calling, it’s the ability to just invent and see hundreds, thousands, potentially millions or even billions of people use something that you created. And what could be more fun than that?

Nathan: I love that. Well, look, we’ll wrap there, Steve. I could talk to you all day, man. But look, where’s the…?

Steve: Thank you, Nathan.

Nathan: Where’s the best place our audience can find you? And this is…yeah, for the podcast.

Steve: So there is a website called steveblank.com. You’ll find every possible way to screw up a start-up, because I’ve done them. So you’ll find a tab with start-up tools, you’ll find the secret history of Silicon Valley, you’ll find lots of blog posts on entrepreneurship and best practices. So good luck to all your listeners and I hope to see something incredibly creative from them.

Nathan: Thank you so much. I hope you have a great day. Thank you for your time.